Tax Tail Wagging My PP Dog

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I Shrugged
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Tax Tail Wagging My PP Dog

Post by I Shrugged » Mon Aug 25, 2014 1:54 pm

I'm about at my rebalance bands.  Stocks 34%, Gold 16.5%.  And in a bit of market timing sentiment, I'm ready to make the moves.  But my god the taxes.  Our portfolio is almost all taxable (non-sheltered), and our stocks are all in taxable.  In our three stock index funds, we are looking at built in gains of between 45 to 57 percent.  They were bought in the post-crash period during a big round of tax loss harvesting.  And yes, I'm talking actual gains;  nothing was reinvested and all dividends were distributed so I could control the asset allocation.  There is no new money going into our PP.  We are in distribution mode, but it's big enough that it makes more than we spend.  I know, one percenter problems.  :)

I am going to call my CPA after posting this.  But I'm up for any education or opinions.  How can I tell what this is going to do to my tax bill?  Will it kick me into AMT?  That's the real unknown.  And there are so many phaseouts that by the time I'm done, the true tax rate might be double what the gains rate is.  Plus I have state taxes.  The gains which would be realized are quite large.  Six figures.  Part of me says why rebalance in light of that?  It would take a very good sized stock crash to make me worse off than rebalancing and paying the taxes.

PS:  I have no losses to harvest.

Comments? 
Last edited by I Shrugged on Mon Aug 25, 2014 2:02 pm, edited 1 time in total.
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buddtholomew
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Re: Tax Tail Wagging My PP Dog

Post by buddtholomew » Mon Aug 25, 2014 1:59 pm

Do you have losses in gold that can offset the gains in equities? Do you also plan to rebalance to 25%? You may want to only sell 5% of your equity allocation to minimize the tax implications for 2014 and the remainder in 2015. Your CPA can comment on marginal tax bracket and AMT implications.
Last edited by buddtholomew on Mon Aug 25, 2014 2:01 pm, edited 1 time in total.
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I Shrugged
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Re: Tax Tail Wagging My PP Dog

Post by I Shrugged » Mon Aug 25, 2014 2:04 pm

No, I have no losses.  I just went back and added that to the post.

Everything in taxable was bought during a restructuring after the crash, so it's all up since then.  Yay!  Obviously that's good, but for the rebalancing taxes.
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Re: Tax Tail Wagging My PP Dog

Post by Tyler » Mon Aug 25, 2014 3:10 pm

A good CPA will be faster to actionable advice, but I've used Turbotax in the past to run through different scenarios.  Here's a simplified version:  https://turbotax.intuit.com/tax-tools/c ... ster/    You can check their website for more options.

Also, for a large rebalance you might consider splitting it between two tax years.  So sell half the last week in December, and the rest the first week of January.  That may be able to keep you in a more advantageous tax bracket both years.
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Re: Tax Tail Wagging My PP Dog

Post by buddtholomew » Mon Aug 25, 2014 4:35 pm

MangoMan wrote: Tyler, splitting over 2 tax years is great advice.

Shrugged, my investments are mostly taxable also, but because I am still accumulating, I have been adding to bonds and gold so my stocks are only at 22.3%. I try to avoid selling anything by adding to the lagging asset(s). That won't work for you , unfortunately, so I have no advice to add.
MangoMan, how are stocks only 22.3% of the PP and not considered a lagging asset?
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I Shrugged
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Re: Tax Tail Wagging My PP Dog

Post by I Shrugged » Mon Aug 25, 2014 5:13 pm

I did a couple of hours of research and ran it by the CPA.  CPA punched a couple of different scenarios into their software using our 2013 return.  Bottom line including state taxes would be that we would start out around 20% taxes on the gains.  If the gains get bigger, the Medicare Surtax would kick in, plus some phaseouts, we'd be in the mid-20's.  If I sell any GLD, then the rates are well into the 30's.

So it's a trick box.  I can't see rebalancing with a 20-30% penalty.  I need to sleep on it.
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Re: Tax Tail Wagging My PP Dog

Post by I Shrugged » Mon Aug 25, 2014 5:17 pm

By the way, do you know that the collectibles tax is not simply 28%?  It is 28% max.  It's less if you are in a tax bracket lower than 28%. 
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Re: Tax Tail Wagging My PP Dog

Post by Tyler » Mon Aug 25, 2014 5:49 pm

I Shrugged wrote: By the way, do you know that the collectibles tax is not simply 28%?  It is 28% max.  It's less if you are in a tax bracket lower than 28%.
Thanks for posting that.  The 28% rate is quoted so often I usually take it for granted.  You spurred me to dig around and find this:

http://blog.silversaver.com/taxes-on-pr ... -and-gold/

It's taxed as ordinary income, up to a max of 28%.  That's a big difference!
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Re: Tax Tail Wagging My PP Dog

Post by Libertarian666 » Tue Aug 26, 2014 10:27 am

I would definitely consider splitting it over two (or more) years, as that can save a lot in taxes with big gains.
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Re: Tax Tail Wagging My PP Dog

Post by barrett » Tue Aug 26, 2014 10:57 am

Shrugged,

Maybe just sell your stock position down now to whatever doesn't kill you in tax terms, and rebalance evenly into the other three assets? Let's say you end up with a 31/23/23/23 allocation, for example, and then you could reevaluate after the 1st of the year. You would at least be taking some gains in stocks.

I am curious if people on this forum see this as exposing a flaw in the PP. The distribution phase of the PP seems to require more savvy than the accumulation phase, at least when you are dealing with taxable accounts. Good luck with whatever you decide.
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Re: Tax Tail Wagging My PP Dog

Post by Tyler » Tue Aug 26, 2014 11:25 am

barrett wrote: I am curious if people on this forum see this as exposing a flaw in the PP. The distribution phase of the PP seems to require more savvy than the accumulation phase, at least when you are dealing with taxable accounts.
I personally see the PP tax flexibility as a feature, not a flaw.  Large rebalances definitely take a bit of planning, but they don't happen all that often and there are ways to mitigate the taxes on your own terms.
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Re: Tax Tail Wagging My PP Dog

Post by Pointedstick » Tue Aug 26, 2014 12:00 pm

Here's an idea: if you have any PP assets or lots of any assets that have capital losses, sell those lots to harvest their losses, and offset your gains with them. Then use the proceeds from the sales to buy slightly different versions of the same basic assets (so as not to trigger the wash sale rule): for example, TLT -> individual bonds, or Physical gold -> GLD or GTU, or VTI -> SPY.
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I Shrugged
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Re: Tax Tail Wagging My PP Dog

Post by I Shrugged » Tue Aug 26, 2014 8:48 pm

I have nothing with losses, nothing at all.  That's a good thing, for sure.  I have not bought anything in probably 5-7 years.  Well, maybe just some cash-like short term bond fund purchases.  Just letting it grow, less the distributions we've spent. 
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Re: Tax Tail Wagging My PP Dog

Post by Kbg » Sun Aug 31, 2014 6:03 pm

Run some historical scenarios on what you might lose if you don't rebalance. US Stocks are A) on one of their longer term bull runs and B) quite expensive by all measures that matter. They have been more expensive, but they are in the area where the markets normally correct.  One simple scenario...which would be a ball park estimate.

Whatever your taxes are going to be by whatever your losses would be with a 25-33% market decline in equities with and without rebalancing then project 6-15% annually for an equities rebound. (Likely on the higher end as rebound returns are normally higher than LT historical average).

The good thing about this problem is it is simple math against whatever you decide the future may look like.
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Re: Tax Tail Wagging My PP Dog

Post by Tyler » Tue Sep 02, 2014 2:10 pm

Random weekend thought on the tax topic (yes, I need to get out more):

Depending on your situation, there could be something to be said for rebalancing annually rather than sticking strictly to the bands.  For a couple married filing jointly, up to $73,800 of long-term stock and bond capital gains per year are tax free.  And for gold, one can make the argument that a retired couple living solely off their PP should prioritize their withdrawals as: 1) dividends/interest, 2) gold sales (when over 25% of the portfolio) up to the $20,300 standard deduction + personal exception total, and 3) cash.  That will provide a nice tax-free baby gold rebalance annually, help delay any large gold rebalance down the line, and prolong the cash portion as well.

Any tax advisers out there should should feel free to correct my reasoning before I learn the hard way.  ;)
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Re: Tax Tail Wagging My PP Dog

Post by TripleB » Mon Sep 08, 2014 12:49 am

I haven't done the specific research to see if this is feasible, or what the costs are, because it doesn't apply to me and it won't be an easy calculation, but what if you used options and/or inverse ETFs to delay rebalancing?

For example, suppose you bought some double/triple inverse stock ETF with some of your cash portion. For each 1% of your portfolio that's in an 3x Inverse Stock ETF, 3% of your stock portfolio is "neutralized" and between the two, you essentially have 4% "cash".

Of course, that's not strictly true due to the costs involved in holding the inverse ETF. However, if you simply want to delay selling for a few months until 2015, you could consider this method.

Alternatively (and probably a much better option, pun intended), is to use options. You could buy some options to sell the SP500 Index Fund at current market value. Such that if the market drops, your options increase in value. If the market goes up, your options lose money, but you counterbalance that with the fact that 35% of your portfolio is stocks and those are going up. You're basically time-shifting the sale of your stocks at the cost of the options. If the cost of delaying the sale of the stocks is less than the tax difference of holding off, then consider it.

I'm not sure why you're so opposed to just paying the 15% capital gains tax and "reset" the cost basis. You're going to have to pay those taxes eventually anyway, and if you reset the cost basis now, then if you experience losses in stocks going forward, you benefit substantially from being able to deduct those losses against marginal income tax rates. Tax loss harvesting.

Since all of your money is taxable anyway, I don't see you losing much by paying the taxes now. If you had to liquidate some of your 401k to pay taxes, that would be awful. But since your money is all taxable, it makes little difference in the long run. Sure, you lose the compounding effect of what those taxes today could have earned over time, but I think that's negated by your newfound ability to tax loss harvest on your zero cost basis stocks. You'll note that I started this post with complicated and expensive strategies to lock in your earnings without paying taxes. I did that intentionally to make this option look better because just paying the taxes is probably your best option unless you live in a state with 5%+ state income tax and plan to retire in a 0% state income tax state in the near future.

The last piece of advice I have is to consider donating appreciated shares of stock to charity, if you're so inclined. You get the full tax deduction from the total value of the appreciated shares, and no one pays taxes on the earnings. Not you nor the charity.
Last edited by TripleB on Mon Sep 08, 2014 12:51 am, edited 1 time in total.
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Re: Tax Tail Wagging My PP Dog

Post by Kshartle » Mon Sep 08, 2014 7:16 am

TripleB wrote: The last piece of advice I have is to consider donating appreciated shares of stock to charity, if you're so inclined. You get the full tax deduction from the total value of the appreciated shares, and no one pays taxes on the earnings. Not you nor the charity.
Wouldn't that be unpatriotic and unfair to all the baby birds depending on those tax dollars? Sen. Schumer would be very unhappy if he had to back on his congressional staff. Ohhh wait, they're probably unpaid interns to begin with. The irony is these unpaid interns probably help him work on min wage legislation.
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Re: Tax Tail Wagging My PP Dog

Post by brownehead » Mon Sep 08, 2014 9:12 am

Some simple options:
-Sell only from the stocks found with less gains.
-Sell something now and something more in january
-Rebalance stocks to 30% or so, instead of 25% (we don't really know if stocks will be up or down next years, but we know for sure that you are going to pay taxes on the sellings).
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